Question

Winning one of the big national lotteries provides a choice of how to receive the money. You can receive a much-reduced lump sum (like half or so) today, or the full amount in twenty annual payments starting today. Discuss how you can determine which financial deal is better. Also, what are the non-financial aspects to winning the lottery and how do they influence which option to take?

Answer 1

Ans- To know which Financial deal is better a very important concept in finance that is known as time value of money can be used to know or determine which financial deal is better whether it is wise to take lump sum money today or to take twenty annual payments starting from today. we have to calculate the present value of all the future cash flows for twenty years i.e the annuity amounts which will be received in twenty years. If the present value of all the future cash flows is greater than the present value of lump sum amount which is received today than the annuities for twenty years should be taken and if it is less than today's value than lump sum amount should be taken. In other words, the amount which is greater should be selected.

Nonfinancial aspects of winning the lottery and the influence to decide what to do with money or which deal to make can be of various reasons and also it depends on the person to person. If you can not wait for twenty years and you are in urgent need of money than it should be taken today, but if you are very bad in managing your finance then it should be kept invested by that you can do better with the money. If anyone goal is to invest money then annuity deal is a better option.

There are various other factors which can influence are-

1 Paying off debt

2 Start a company or Business

3 Buying materialistic things like house, car, expensive gifts, etc

4 Thinking of retirement plan.

5 Long Holiday Vacations

These few factors which can influence after winning the lottery.